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Wednesday, 17 October 2012

Public Expenditure and GDP: it's not so simple.

In a recent Guardian article, Aditya Chakraborthy pointed out that the UK government aims to reduce public expenditure by 2017 to around 40% of Gross Domestic Product - and that this will bring it down to American levels. We are supposed to be shocked. How could any rational person want to bring public expenditure down to American levels? All decent people surely think that it should be rising to Scandinavian levels - fifty percent.

To me, this is the wrong way to think about things. What matters is not the level of public expenditure but what it is spent on - and what it is spent on depends on the culture and the political culture of a country. Higher public expenditure does not, in itself, produce a more civilised, fairer or nicer society. And in some cases, it may be possible to get a better society with lower public expenditure rather than higher.

In the UK voters are quite keen on vanity expenditure by governments and they are quite keen on circuses. So public expenditure on the monarchy, royal weddings, the Olympics and the Red Arrows is not controversial. And governments themselves are quite keen on military spending, on handing out lucrative contracts to the private sector and on keeping corruption alive in the shape of the House of Lords. That's a lot of pubic spending already.

In a different culture, all these expenditures - and especially the military ones - would be reduced or eliminated. The nice Scandinavian countries are much less keen on wars than we are, so they spend less on fighting them. Much less.

It is often thought that taxation and expenditure needs to be higher than forty percent of GDP in order to reduce Inequality. You tax the rich and transfer money to the poor, less the (considerable) overhead costs of administering such schemes of redistribution. (At the moment, of course, here in the UK we don't tax the rich. We tax the moderately well-off who only have to be earning thirty odd thousand a year to be stuffed for forty percent Income Tax - an extortionate rate no rich person would dream of paying).

But even if we could sort out the tax system so that the rich really did get taxed, I am not sure that this is the best way of creating a more equal society. It would be much better to stop inequality at source. That would mean, for example, caps (ceilings) on legal remuneration. Pay packages in excess of (say) a million simply would not be allowed. Inheritances would likewise be capped with 100% tax kicking in at (say) over £10 million. That's how you create a more level playing field for each new generation.

At the other end, instead of subsidising wages from taxes the state would enforce higher minimum wages than we are currently familiar with. No one should really be working for less than £10 per hour - in London, more.

Along these lines, it might even be possible to create a fairer, more egalitarian society which was also a low tax society. There is no inherent virtue in taxation and in countries like the UK the willingness of citizens to be taxed really allows over taxation combined with immensely wasteful government expenditures yielding no discernible public good.